Cinram Reports Positive Third Quarter Results Reversing Trends from Previous Quarters in 2011

(All figures in U.S. dollars unless otherwise indicated)

TORONTO, Nov. 7, 2011 /CNW/ - Cinram International Income Fund ("Cinram" or the "Fund") (TSX: CRW.UN) today reported its 2011 third quarter and year to date financial results.

Q3-2011 Operating Results

  • Consolidated revenue of $209.2 million in the third quarter of 2011 exceeds Q2-2011 revenues of $147.5 million, an increase of $61.7 million or 42%, as studio orders returned to more normal levels.
    • Revenue from the pre-recorded multimedia products of $182.1 million grew from $124.5 million in Q2-2011, primarily as a result of growth in new release revenue as well as a strong performance from CD volumes. Q3-2011 revenues were comparable with the prior year period, after adjusting for the loss of Warner Home Video.
    • Revenue from the video games segment in the third quarter of 2011 was $9.5 million, up 48% from Q2-2011 revenues of $6.4 million. The drop from the $11.1 million in Q3-2010 was due to the sale of certain customers to new owners and the subsequent cancellation of service contracts and a general decline in volume.
    • Revenue from our other businesses, including wireless, retail services and our new digital media services group continues to grow, with third quarter revenue of $17.6 million up from $16.6 million in Q2-2011 and up 36% from $12.9 million in the comparable quarter of 2010.
  • Earnings before interest, taxes, impairment charges and amortization (EBITA1), excluding other charges, was $12.4 million in third quarter of 2011, substantially eliminating the EBITA losses from the first half of the year.
    • EBITA from the pre-recorded multimedia business was $10.8 million in the third quarter of 2011, reflecting a significant recovery of over $15.0 million negative EBITA from the disappointing results of the second quarter of 2011. EBITA in Q3-2010 was $21.5 million, generally reflecting the impact of the final months of the WHV contract which expired during that quarter.
    • EBITA generated by the video games business segment in the third quarter of 2011 includes one-time costs related to consolidating various games distribution facilities.
    • EBITA from the other business segments, including the wireless division, retail services and the digital media services group are growing steadily, increasing to $3.6 million in the third quarter of 2011 and up significantly from $2.1 million in the third quarter of 2010.

Commented Steve Brown, CEO, "The third quarter saw business return to more normal levels and the impact of the new client awards signed in Q2 start to show positive results. These new contracts were completed in Q2 and are just now starting to contribute to the revenues of the Fund. In addition, we are seeing the return of some distribution activities related to Warner Home Video in some geographic locations. A very positive trend in Q3 is the continuing strong performance of both the wireless division and the digital media group." 

Other financial highlights

Pre-recorded multimedia segment:

  • Cinram replicated 169 million DVDs in the third quarter of 2011, over double the 82 million units replicated in the second quarter of 2011. Unit volume in Q3-2010 was 226 million, including approximately 50 million units for Warner Home Entertainment.
  • DVD revenue (which includes replication and distribution services) was $141.6 million for the third quarter of 2011, compared to $91.2 million in the second quarter of 2011.
  • Blu-ray disc replication revenue was $10.7 million in the third quarter of 2011, compared to $5.7 million in the second quarter, reflecting the growing importance of high definition Blu-ray discs in the physical media segment.
  • CD revenue (including replication and distribution of CDs) of $29.8 million was up slightly from the $27.6 million recorded in the second quarter, as demand for this format has been steady given the consumer price reductions recently offered at retail. Revenue in this quarter was down 9% from the $32.7 million reported in Q3-2010.

Geographic revenue:

Third quarter 2011 North American revenue of $115.2 million was up significantly from the $85.8 million recorded in the second quarter of 2011, principally as a result of a substantial increase in volumes as our studio customers rebounded from a very soft first half of 2011.  North America accounted for 55% of third quarter consolidated revenue, down from the 58% reported in the second quarter but in line with the prior year period.

European revenue of $94.0 million was up $32.3 million from the $61.7 million reported in the second quarter, again reflecting the significant increase in replication and distribution activity, partially driven by new contract awards announced earlier this year. European revenue represented 45% of consolidated sales, up from the 42% reported in the second quarter of 2011 and in line with the third quarter of 2010.

Reconciliation of EBITA and EBIT to net earnings (loss) from continuing operations  
  Three months ended September 30 Nine months ended September 30
(unaudited, in thousands of U.S. dollars)   2011   2010   2011   2010
EBITA excluding other charges $       12,392 $ 23,973 $     (924) $       82,620
Other charges, net               -              3,516            10,717             1,162
EBITA            12,392             20,457         (11,641)           81,458
Impairment of property, plant and equipment             -                    -              17,311                   - 
Amortization of property, plant and equipment               4,370             10,680            19,448           33,650
Amortization of intangible assets                  872               1,291              2,339             3,871
EBIT            7,150               8,486         (50,739)           43,937
Net finance costs (income)            21,427             (6,793)            79,451           19,955
Income taxes (recovery)              (4,045)             1,351              250               359
Net earnings (loss) from continuing operations $       (10,232) $         13,928 $    (130,440) $         23,623

The Fund reported a net loss from continuing operations for the 2011 third quarter of $10.2 million, or $0.16 per unit (basic), compared with net earnings from continuing operations of $13.9 million, or $0.25 per unit (basic), in 2010. The loss includes net finance costs of $21.4 million, which includes $12.9 million of interest expense combined with $10.4 million of non-cash unrealized foreign exchange losses primarily relating to intercompany loans.

Comparative information is presented for the Fund's 2011 second quarter to reflect the reversal of trends experienced relative to previous quarters in 2011.  The seasonality of Cinram's business, with pre-recorded multimedia products sales higher in the third and fourth quarters due to consumer holiday buying patterns, affects comparisons between quarters.

IFRS Reporting Commenced First Quarter of 2011

Starting with the first quarter of 2011, Cinram has reported its financial results in accordance with International Financial Reporting Standards (IFRS), as required for public companies in Canada. Previously, the Fund prepared its financial results under Canadian generally accepted accounting principles (GAAP).  The comparative financial information has been restated to reflect the adoption of IFRS, with effect from January 1, 2010.  Periods prior to January 1, 2010 will not be presented under IFRS.

The Fund has included reconciliations between IFRS and the amounts previously reported under GAAP in its third quarter 2011 interim consolidated financial statements.

¹ EBITA is defined in this report as earnings (loss) from continuing operations before impairment charges, net finance costs (including interest expense, foreign exchange translation gains/losses, investment income, transaction costs, lender consent fees, issuance of Fund units and warrants and change in fair value of derivatives), income tax expense (recovery), and amortization and is a standard measure that is commonly reported and widely used in the Fund's industry to assist in understanding and comparing operating results. EBITA is not a defined term under IFRS. Accordingly, this measure should not be considered as a substitute or alternative for net earnings or cash flow, in each case as determined in accordance with IFRS.  A reconciliation of EBITA to net earnings (loss) under IFRS is found in the table above. 

² EBIT is defined in this report as earnings (loss) from continuing operations before net finance costs (including interest expense, foreign exchange translation gains/losses, investment income, transaction costs, lender consent fees, issuance of Fund units and warrants and change in fair value of derivatives) and income tax expense (recovery) , and is a standard measure that is commonly reported and widely used in the Fund's industry to assist in understanding and comparing operating results. EBIT is not a defined term under IFRS. Accordingly, this measure should not be considered as a substitute or alternative for net earnings or cash flow, in each case as determined in accordance with IFRS.  A reconciliation of EBIT to net earnings (loss) under IFRS is found in the table above. 

About Cinram

Cinram International Inc., an indirect, wholly-owned subsidiary of the Fund, is one of the world's largest providers of pre-recorded multimedia products and related logistics services. With facilities in North America and Europe, Cinram International Inc. manufactures and distributes pre-recorded DVDs, Blu-ray Discs, CDs, and CD-ROMs for motion picture studios, music labels, publishers and computer software companies around the world. Cinram also provides distribution and logistics services to the telecommunications industry in North America through its wireless subsidiary. The Fund's units are listed on the Toronto Stock Exchange under the symbol CRW.UN. The Cinram group of companies also incorporates 1K Studios, a digital media firm based in Los Angeles specializing in building enhanced consumer experiences for movies, TV shows, music, books and games. For more information, visit www.cinram.com.

Certain statements included in this management's discussion and analysis (MD&A) contain words such as "could," "expects," "expectations," "may," "anticipates," "believes," "intends," "estimates" and "plans" (and similar expressions) and constitute "forward-looking statements" within the meaning of applicable securities laws. These statements are based on the Fund's current expectations, estimates, forecasts and projections about the operating environment, economies and markets in which it operates. Such forward-looking statements, and other forward looking statements specifically identified, involve known and unknown risks, uncertainties and other factors that are difficult to predict and may cause the actual results, performance or achievements of the Fund to be materially different from any future results, performance or achievements expressed or implied by these forward-looking statements. These factors include, among others, the following: general economic and business conditions that will, among other things, impact the demand for the Fund's products and services (including risks related to international operations and foreign exchange risks); the Fund's ability to retain major customers and the variability in the popularity of the titles released by those customers; multimedia replication industry conditions and capacity (including, among other things, competitive and pricing pressures, increases in raw material costs, increasingly compressed production cycle and seasonality of the business, the need for capital expenditures for maintenance of Blu-ray and standard DVD capacity, and variability in quarterly earnings); risks associated with the Fund's leverage generally, and its potential impact on the business; risks relating to the August 2011 amendment to certain covenants included within the April 2011 refinancing and recapitalization plan, including the risk of non-compliance; risks of dilution to unitholders from issuances of equity interests (including on exchange of debt); the Fund's ability to implement its business strategy; a shortage of product due to labour disruptions; the Fund's ability to invest successfully in new technologies; the current estimated financial impacts of converting to IFRS accounting standards and other factors. All of the foregoing factors are described in detail in the Fund's filings with Canadian securities commissions (reference is made in particular, but without limitation, to the section entitled "Risks and Uncertainties" in the 2010 annual report and to prior quarterly financial reports).  For a complete list of risks and uncertainties, please consult the Fund's annual information form filed with Canadian securities commissions, available on www.sedar.com.


INTERIM CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(in thousands of U.S. dollars)

           
    September 30
2011
(unaudited)
    December 31
2010
           
ASSETS          
Current assets:          
Cash and cash equivalents $      36,573   $  164,399
Trade and other receivables   161,310     177,760
Inventories   $32,493     24,109
Current income tax assets   -     706
Prepaid and other assets   11,228     10,910
Total current assets   241,604     377,884
           
Property, plant and equipment   158,757     165,675
Investment property   8,124     8,446
Goodwill   40,634     40,634
Intangible assets   10,256     11,349
Other non-current assets   19,184     25,701
Total assets $  478,559   $  629,689
           
LIABILITIES AND UNITHOLDERS' DEFICIENCY          
Current liabilities:          
Trade and other payables $  150,348   $  149,559
Provisions   12,591     17,468
Employee benefits   31,429     39,498
Current tax liability   14,715     13,749
Current portion of long-term debt   9,465     365,927
Mandatorily exchangeable secured debt   97,764     -
Current derivative financial instruments   -     11,087
Current portion of obligations under financing leases   9,714     1,141
Total current liabilities   326,026     598,429
           
Long-term debt   222,062     -
Obligations under financing leases   8,611     1,086
Other non-current liabilities   971     7,254
Non-current derivative financial instruments   4,468     -
Provisions - non-current   6,059     5,787
Employee benefits   20,318     20,864
Deferred tax liabilities   1,536     1,229
Total liabilities   590,051     634,649
Unitholders' deficiency   (111,492)     (4,960)
Total liabilities and unitholders' deficiency $  478,559   $  629,689

INTERIM CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(unaudited, in thousands of U.S. dollars, except per unit)

                         
  Three months ended Nine months ended
  September 30 September 30
    2011     2010     2011     2010
Revenue  $ 209,207   $ 254,087   $  533,369   808,864
Cost of goods sold    171,315     209,704     468,439     658,608
Gross profit    37,892     44,383     64,930     150,256
Selling, general and administrative expenses    30,742     32,381     87,641     105,157
Impairment of property, plant and equipment        -     17,311     -
Other charges, net         3,516     10,717     1,162
Results from operating activities    7,150     8,486     (50,739)     43,937
Net finance costs (income)    21,427     (6,793)     79,451     19,955
Earnings (loss) before income tax expense    (14,277)     15,279     (130,190)     23,982
Income tax expense (recovery)    (4,045)     1,351     250     359
Earnings (loss) from continuing operations    (10,232)     13,928      (130,440)     23,623
Loss from discontinued operations net of income tax    -     -     -     (827)
Earnings (loss) for the period  $ (10,232)   $ 13,928   $ (130,440)   $ 22,796
Earnings (loss) from continuing operations per unit:
  Basic   $ (0.16)   $ 0.25   $ (2.16)   $  0.43
  Diluted    (0.16)     0.25     (2.16)     0.42
Earnings (loss) per unit:
  Basic     (0.16)     0.25     (2.16)     0.41
  Diluted    (0.16)     0.25     (2.16)     0.41

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited, in thousands of U.S. dollars)

                       
    Three months ended      Nine months ended
    September 30     September 30
    2011     2010     2011      2010
Earnings (loss) for the period  $  (10,232)   $  13,928   $   (130,440)    $  22,796
                       
Other comprehensive income, net of income taxes                      
  Unrealized gain (loss) on translating financial statements of foreign operations    11,910     (6,243)     12,856      (7,685)
  Unrealized gain (loss) on hedges of net investment in foreign operations    (5,946)     5,277     (1,371)      2,291
  Unrealized foreign exchange translation gain (loss), net of hedging activities    5,964     (966)     11,485      (5,394)
  Release of other comprehensive income due to de-designation of hedge    -     3,649     5,012      11,026
  Unrealized defined benefit actuarial loss    -     -     (7)      -
  Other comprehensive income    5,964     2,683     16,490      5,632
                         
Total comprehensive income (loss) for the period, net of income taxes  $  (4,268)   $  16,611   $  (113,950)    $  28,428

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited, in thousands of U.S. dollars)

                       
    Three months ended      Nine months ended
    September 30     September 30
    2011     2010     2011     2010
Cash flows from operating activities:                      
  Earnings (loss) for the period  $  (10,232)   $  13,928   $  (130,440)   $   22,796
  Items not involving cash:                      
    Amortization expense     5,242     11,971     21,787     37,521
    Impairment of property, plant and equipment    -      -     17,311      -
    Unrealized foreign exchange (gain)/loss on intercompany                      
    loans and release of cumulative translation adjustment    10,416     (11,250)     8,171     (73)
    Mark-to-market adjustment of derivative liabilities    (1,428)     (7,238)     (9,660)     (15,092)
    Release of accumulated other comprehensive income due to de-designation of hedge     -     3,649     5,012     11,026
    Loss (gain) on disposal of property, plant and equipment    -     -     -     (7,460)
    Lender consent fees and transaction costs    865     -     32,192     -
    Issuance of fund units    -     -     7,351      -
    Interest expense    12,987     8,101     35,698     24,808
    Income tax expense    (4,045)     1,351     250     359
    Other    819     2,154     1,126     5,950
  Change in provisions    (2,023)     (624)     (4,918)     3,600
  Change in employee benefits    (2,082)     (4,792)     (8,899)     (14,369)
  Income taxes received (paid)    (48)     (90)     (45)     2,057
  Change in non-cash operating working capital     (17,886)     (3,457)     17,888     (15,600)
  Net cash provided by (used in) operating activities    (7,415)     13,703     (7,176)     55,523
                         
Cash flows from financing activities:                      
  Lender consent fees and transaction costs    (5,140)     (1,642)     (39,033)     (2,842)
  Repayment of long-term debt and bank indebtedness    (2,995)     (7,156)     (40,151)     (21,468)
  Interest paid    (11,324)     (7,866)      (25,570)     (24,491)
  Decrease in obligations under financing leases    (989)     (270)     (1,600)     (1,490)
  Net cash used in financing activities    (20,448)     (16,934)     (106,354)     (50,291)
                         
Cash flows from investing activities:                      
  Purchase of property, plant and equipment    (3,561)     (1,802)     (7,618)     (11,509)
  Proceeds on disposition of property, plant and equipment    -     -     -     13,475
  Acquisition    -     -     (2,963)     -
  Increase (decrease) in non-current liabilities    (1,854)     6,483     (7,861)     735
  Decrease (increase) in other non-current assets    3,155     (28)     11,061     4,777
  Net cash provided by (used in) investing activities    (2,260)     4,653     (7,381)     7,478
                         
Cash provided by (used in) discontinued operating activities    -     1,637     (658)     251
Foreign currency translation gain/(loss) on cash held in foreign currencies    (921)     4,829     (6,257)     (1,733)
Net increase (decrease) in cash and cash equivalents    (31,044)     7,888     (127,826)     11,228
Cash and cash equivalents, beginning of period    67,617     125,412     164,399     122,072
Cash and cash equivalents, end of period  $  36,573   $  133,300   $  36,573   $  133,300

 

 

SOURCE Cinram International Income Fund

For further information:

John H. Bell
Tel: 416.332.2902
johnbell@cinram.com

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